Installment sale can lure buyers, ease taxes |
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To make an installment sale feasible, you can either own the property outright before the sale or you can use the down payment and any personal savings you may have to pay off the remaining balance.
This due-on-sale aspect means installment sales are typically most attractive to sellers who have owned a property for many years and are likely to have a small mortgage, if any, remaining, or to investment buyers who tend to put substantially larger amounts of cash down. It doesn't make sense is if a seller still owes a large mortgage or for someone who is facing cash flow shortages.
Incidentally, it is a good idea to include a due-on-sale clause in the paperwork when you are drawing up the promissory note for your sale.
Get help
While they can offer many benefits for the buyer and the seller, installment sales include many technicalities and details that can trip up even the most expert real estate investor. You'll need to consider issues such as who qualifies for tax breaks and what specific protections you need to ensure you aren't stuck on the losing end of a bankruptcy settlement.
For example, the IRS has ruled that "real estate dealers" cannot qualify for the tax advantages of an installment sale. The agency defines a dealer as someone who is in the constant practice of buying and selling houses -- which may include those who flip houses, depending on their specific situation.
Another tax rule to watch out for is that the IRS may determine that you aren't charging a suitable interest rate. In this case they could ignore the rate that you drew up on your papers and assume a higher rate for taxing purposes.
To protect yourself from these pitfalls, Lechter suggests you always employ a tax accountant and a real estate attorney in any transaction you make.
"You need good advice and good advisers,"
she says.
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